COVID real estate: Silicon Valley office market starts to heal
Silicon Valley’s office market remained feeble during the first three months of 2021, but hope has emerged that the battered sector may begin to recover this year from coronavirus-linked ailments, states a report from Colliers International.
During the first quarter of 2021, office vacancies rose, construction activity dwindled, but office rents managed to increase, according to the latest Silicon Valley market report by Colliers International, a commercial real estate firm.
Overall, plenty of challenges remain for the South Bay office market.
“Silicon Valley’s office market continued to be stifled by the pandemic at the start of 2021,” said Lena Tutko, a San Jose-based senior research manager with Colliers International.
Despite the considerable slowdown in the spread of the coronavirus, it’s still not clear how quickly workers will reoccupy their offices, which creates uncertainty over the demand for space.
“Santa Clara County health officials continue to encourage telework for non-essential employees, which is delaying the return to the office for many employers,” Colliers International stated in the report, which Tutko prepared.
The suggestion by government officials that employees continue to consider some level of remote working “is deferring office leasing activity,” Colliers stated in its report.
Since the onset of coronavirus-linked business shutdowns ordered by state and local government officials in March 2020, office vacancies have risen steadily in Silicon Valley, defined by Colliers International as Santa Clara County and the adjacent Fremont market.
The office vacancy rate was 9.4% in Silicon Valley during the January-through-March first quarter of 2021, which was up from 8.2% in the October-through-December fourth quarter of 2020. The office vacancy rate was 74% in the third quarter of 2020 and 6.5% in the second quarter of 2020, according to Colliers.
Silicon Valley’s first-quarter office vacancy rate is also far higher than a year ago when office vacancies averaged 5.9% during the first quarter of 2020.
Economic woes unleashed by the coronavirus prompted decisions to exit offices on the part of companies, including tech firms.
“The uncertainty caused by the pandemic and extended remote work trends saw some tenants shed space,” Colliers International stated in the report.
In turn, that trend has resulted in a steady increase of sublease office space being made available by tenants that no longer wished to occupy those sites.
“The office sublease market expanded for the fourth consecutive quarter,” Colliers stated in its report.
In March 2021, 3.9 million square feet of Silicon Valley office space was available for sublease, Colliers stated. Sublease office space in Silicon Valley was 3.5 million square feet at the end of December 2020, 3.2 million square feet at the end of September 2020, 2.8 million square feet at the end of June 2020, and 2.4 million square feet at the end of March 2020.
First-quarter office rents were lower than the fourth quarter of 2020 but were higher than the year-ago office rents.
Silicon Valley monthly office rents averaged $5.15 a square foot during the first quarter of 2021, compared with $5.06 a square foot in the first quarter of 2020 and $5.17 in the fourth quarter of 2020, according to Colliers.
Despite the wide-ranging difficulties, the prognosis for the office market in the South Bay has improved, Colliers International stated in its assessment.
“There is light at the end of the tunnel with vaccinations ramping up and a date of June 15 set to fully reopen California, which could signal a rebound for Silicon Valley’s office market,” Tutko said.